De­mon­eti­sa­tion: Any ef­fect on use of cash?

Im­me­di­ate im­pact aside, will it in­crease use of non-cash trans­ac­tions?

The spot im­pact of de­mon­eti­sa­tion has been an­a­lysed to no end, and per­haps to no avail. Im­me­di­ately as it oc­curred, I too laid my view bare in this col­umn, in­di­cat­ing that there could be lit­tle con­trac­tionary im­pact if cash re­trac­tion by the Re­serve Bank of India (RBI) was ex­changed with in­jec­tion of coun­ter­part pub­lic fi­nance into the econ­omy, though I did cri­tique the costly flaw in govern­ment per­cep­tion on what de­nom­i­na­tions com­prised the big bills. The RBI’s sub­se­quent an­nounce­ment that the cash with­drawn had re­turned to banks was newly cri­tiqued since, in that case, non-tax paid cash must have found its way com­fort­ably into the tax-paid econ­omy with­out ad­e­quate penalty.

Even this can­not be per­ceived off­hand as an ad­verse de­vel­op­ment if the ef­fec­tive cost to de­pos­i­tors was 30 per cent, or the mar­ginal in­come tax rate. Cir­cu­la­tion of cash through banks is cer­tainly bet­ter than through hawala or re­turn­ing back into India through tax havens. Of course whether banks de­serve to re­ceive more cash when­ever they need re­cap­i­tal­i­sa­tion to ob­vi­ate bad loans to the high and mighty, re­veal­ing bank in­com­pe­tence if not co­er­cion with the po­lit­i­cal and ad­min­is­tra­tive sys­tems, is a sep­a­rate as­pect. That is not today’s fo­cus.

One im­por­tant ef­fect of de­mon­eti­sa­tion that should be an­a­lysed is whether the use of cash will lessen and the use of non-cash trans­ac­tions in­crease. In other words, though ‘old habits die hard’, will they nev­er­the­less change? Since India’s use of non­cash trans­ac­tions is low in a cross-coun­try com­par­i­son, an­tic­i­pat­ing some suc­cess may not be er­ro­neous. Some re­cent in­di­ca­tors would be help­ful per­haps. I use data from the Bank of In­ter­na­tional Set­tle­ments Red Book, De­cem­ber 2016, the lat­est avail­able. The fi­nal year of all re­ported data is 2015. I an­a­lyse data for three com­pa­ra­ble coun­tries, Brazil, China and India.

To be­gin, cash in cir­cu­la­tion in terms of gross do­mes­tic prod­uct (GDP) has been sur­pris­ingly lower in India (12.3 per cent) than in China (13.3 per cent) though in Brazil it has been much lower (3.8 per cent) re­flect­ing a mam­moth suc­cess­ful at­tempt in the 1990s to­wards non-cash use. One could spec­u­late on the rea­sons of China be­ing higher than India. For ex­am­ple, China’s trans­ac­tions vol­umes are so high com­pared to India’s that the cash com­po­nent could be higher. Sec­ond, one ex­pla­na­tion could be that a por­tion of India’s unor­gan­ised econ­omy could still be us­ing barter.

Of course, as might be ex­pected, non-cash use in India trails that of China as Table 1 re­veals. First, in 2015, in terms of num­ber of non-cash trans­ac­tions, India’s was about one-third that of China though, in 2011, the num­bers were pretty close. The change re­flected a mas­sive im­prove­ment in China by 2015. Thus, sec­ond, be­tween 2011 and 2015, im­prove­ment mea­sured in per­cent­age terms was about one-fifth that of China. And, third, in per-capita terms, in­crease in India was about one-quar­ter that of China. Clearly, dur­ing 2011-15, India lagged be­hind China sig­nif­i­cantly in mov­ing to non-cash trans­ac­tions. Note that, re­flect­ing the early re­form in Brazil, the num­bers and in­creases thereof had al­ready sta­bilised over the years con­sid­ered.

Non-cash trans­ac­tions have var­i­ous forms. Table 2 re­veals their per­cent­age dis­tri­bu­tion and change dur­ing 2011-15. An ex­am­i­na­tion of their dis­tri­bu­tion in 2015 re­veals some od­di­ties. Brazil clearly uses cards and credit trans­fers highly. India’s use of cards, at three-quar­ters share — ap­pears over­whelm­ing com­pared to other forms. And since China re­ports no di­rect deb­its at all and lit­tle use of cheques, its use of cards rep­re­sents four-fifths of to­tal non-cash.

A com­par­i­son of the move­ments dur­ing 2011-15 shows dif­fer­ent trends. First, the use of cards in Brazil has over­taken those of cheques and trans­fers. In China, credit trans­fers and cards have grown and cheques have be­come al­most in­signif­i­cant and, of course, there is no re­ported di­rect debit at all! In India too, the use of cheques and di­rect deb­its has re­duced, the only in­crease be­ing credit trans­fers. What is im­por­tant to note is that the share of cards, too, has di­min­ished, though slightly. If Brazil can be taken as a hall­mark for non-cash use, then both India and China’s fu­ture ex­pe­ri­ence would be in the di­rec­tion of higher shares for credit trans­fers and di­rect deb­its. Per­haps this could be but­tressed by in­creased use of net bank­ing. This will need not only more ed­u­ca­tion in how to use it but also con­fi­dence build­ing.

What mea­sures should India take? First, track, for the next five years, its cash in cir­cu­la­tion in terms of GDP, the ob­jec­tive be­ing an ob­serv­able de­crease. Sec­ond, track the num­ber of non-cash trans­ac­tions and whether their growth is ap­proach­ing the gi­gan­tic leaps that China has achieved. Third, among non­cash com­po­nents, are In­di­ans us­ing more net bank­ing and in­creas­ing the use of credit trans­fers and di­rect deb­its. Banks should im­ple­ment help­ful pro­grammes to ed­u­cate even zero bal­ance ac­coun­thold­ers to use net bank­ing — per­haps they will need it soon. With­out these changes, a salient ram­i­fi­ca­tion of any de­mon­eti­sa­tion – to quickly move from cash to non-cash use – will re­main un­achieved.